International accounting firm Deloitte says that low prices for Canadian heavy crude oil could be offset by higher exports to the US Gulf Coast, where Mexican and Venezuelan imports continue to decline.

The latest report by Deloitte’s Resource Evaluation and Advisory (REA) group notes that concerns over transportation bottlenecks to American markets have increased the historic price differential between Western Canadian Select (WCS) and West Texas Intermediate (WTI) oil.

Source: US Energy Information Administration.

Deloitte expects crude oil prices to continue rising in early 2018 as global oil demand remains strong and members of the Organization of Petroleum Exporting Countries (OPEC) look set to extend their current production cuts throughout the year.

“Canadian oil prices lagged behind those in the United States during 2017 largely due to increased US production and possible transportation difficulties getting Canadian oil into that market,” Andrew Botterill, Deloitte’s National Oil & Gas Leader and Partner, REA group, said in a press release.

Kevin Birn, IHS MarkIt director for the Oil Sands Dialogue, says that the differential had actually narrowed somewhat in 2017.

“While the availability of light sweet crude oil has increased since the price collapse began, the heavy market appears to have tightened. Lower prices hastened the decline of historical sources of heavy sour crude oil from Mexico and economic instability pulled down Venezuelan output. OPEC cuts have also largely come from heavier barrels,” Birn said in an email.

“A tighter heavy market and a narrower light-heavy spread for western Canadian producers was the result for the majority of 2017.”

University of Houston energy economist Ed Hirs says he isn’t surprised that Mexican and Venezuelan crude shipments to the US are declining.

“For Mexico, the precipitously declining production was anticipated as the Mexican government began to open its domestic industry to foreign ownership and development. PEMEX has been run as a government welfare agency just like PDVSA and not as an oil company,” he said in an email.

“As for Venezuela and PDVSA, any oil that can shipped from Venezuela is being taken as payment in kind by Venezuela’s creditors. The least expensive replacement is Canadian crude which continues to be shipped by pipelines and the more expensive crude by rail. The Canadian crude will continue to be competitive as crude prices rise generally.”

“But if Canada can take advantage of declining Venezuelan and Mexican exports to the U.S. and access some of its heavy oil refining capacity, the price differential between WCS and WTI should at least be moderate compared to the historical differential,” said Botterill.

He adds that the US is increasing its light oil production after rig counts rose throughout 2017. In the Permian Basin alone IHS MarkIt is predicting growth from about 2.5 million b/d last year to just over 5 million b/d by 2022.

The United States is boosting oil exports to large consumer markets such as Asia, which now accounts for one-third of its crude oil export volumes. Crude shipments averaged around 1.5 million b/d over Q4 2017, triple the export volumes from a year earlier.

Meanwhile, import volumes in the U.S. during 2017 remained similar to those during the previous year, giving Canadian producers an opportunity to pick up some of the market previously supplied by Mexico and Venezuela.

“Looking forward, we expect crude-by-rail will be adding cost to transport Canadian heavy crude to market and reducing the value to Canadian producers,” said Birn.

“IHS expects Latin American heavy sour production to continue to decline and there is potential for narrower global light-heavy differentials to persist should OPEC maintain their preferential cuts. This could help to offset some of the increased cost of rail on Canadian producers.”

Taking into account increased crude oil prices over the final two quarters of 2017 and the increased heavy oil price differential, Botterill says Deloitte is forecasting a price of $55USD/b for WTI in 2018 and $46.40CDN/b for WCS.